whateverworks

Twin Peaks
Wednesday September 05, 2007 : 04:50 PM

A few days ago Strategy Lab posted another Question of the Week: In looking at the most widely held and most bought stocks in the Strategy Lab Open this week, we see Apple duking it out with Research In Motion - a clear case of the momentum buyers (AAPL) vs. the bargain hunters (RIMM). Which approach do you favor, and why? Give us some examples from your portfolio.

Personally, I want the best of all worlds and search for a growth company with stock price rising fast but still at a bargain value.

I think both AAPL and RIMM could be called "Momentum". Financially, they almost look like twins to me except that the price for RIMM (bargain) is generally up twice as much as AAPL (momentum)! Compare the following figures (mostly from finance.yahoo.com.):

Supposedly representing a Bargain Stock.
RIMM - Research in Motion (46B mkt.cap.)
       Top and bottom line up. Good balance sheet.
       Style characterized at Marketocracy as "Large Cap Growth".

       PEG Ratio (5 yr expected): 1.55 (lower is better)
       Price/Sales (ttm): 13.19 (lower is better)
       Price/Book (mrq): 16.88 (lower is better)
              (This is a high-tech company so price-to-book is not too meaningful.)

       Return on Assets (ttm): 19.50% (higher is better)
       Return on Equity (ttm): 29.72% (higher is better)

       Stock Price Pct from 200d MA is Up 43.29%. Pct from 50d MA is Up 9.02%.
       Stock Price Pct from Yr Low is Up 219.55%. Pct from Yr High is Down 3.87%.

Supposedly representing a Momentum Stock.
AAPL -- Apple Inc. (121B mkt.cap.)
       Top and bottom line up. Good balance sheet.
       Style characterized at Marketocracy as "Large Cap Growth".

       PEG Ratio (5 yr expected): 1.56 (lower is better)
       Price/Sales (ttm): 5.24 (lower is better)
       Price/Book (mrq): 8.83 (lower is better)
              (This is a high-tech company so price-to-book is not too meaningful.)

       Return on Assets (ttm): 14.18% (higher is better)
       Return on Equity (ttm): 27.57% (higher is better)

       Stock Price Pct from 200d MA is Up 22.20%. Pct from 50d MA is Up 7.36%.
       Stock Price Pct from Yr Low is Up 94.06%. Pct from Yr High is Down 5.39%.

I wouldn't have characterized either of the above as a "bargain" stock, especially not RIMM with a price-to-sales ratio of 13.19. Both do have a 5-year expected PEG Ratio under 2, which is supposed to be OK, but not under 1 which is supposed to be good. Both have a lower PEG Ratio than my stock PKX but higher than my CHL (see below). In the Value area, both have what I think is a good return on assets and return on equity, much better than PKX; however CHL is competitive. On the other hand, I'm not an expert in any of the subject industries; so don't take my word for what is a good ROA or ROE.

Following are examples of my attempt at finding a growth company which also has good value and a rising stock price.

POSCO (PKX) (47B mkt. cap.)
       Top line up, bottom holding even. Good balance sheet.
       Style characterized at Marketocracy as "Large Cap Growth".

       PEG Ratio (5 yr expected): 1.89 (lower is better)
       Price/Sales (ttm): 1.75 (lower is better)
       Price/Book (mrq): N/A at Yahoo. 1.97 per my own calculation. (lower is better)
              (This is a steel company so price-to-book is meaningful.)

       Return on Assets (ttm): 9.33% (higher is better)
       Return on Equity (ttm): 16.01% (higher is better)

       Stock Price Pct from 200d MA is Up 24.43%. Pct from 50d MA is Up 7.76%.
       Stock Price Pct from Yr Low is Up 144.31%. Pct from Yr High is Down 3.88%.

China Mobile Limited (CHL) (268B mkt. cap.)
       Top line up, bottom line up. Good balance sheet.
       Style characterized at Marketocracy as "Large Cap Value".

       PEG Ratio (5 yr expected): 1.00 (lower is better)
       Price/Sales (ttm): 6.34 (lower is better)
       Price/Book (mrq): 6.03 (lower is better)
              (This is a cell phone company so price to book may not be meaningful.)

       Return on Assets (ttm): 14.26% (higher is better)
       Return on Equity (ttm): 23.21% (higher is better)

       Stock Price Pct from 200d MA is Up 32.29%. Pct from 50d MA is Up 14.65%.
       Stock Price Pct from Yr Low is Up 106.60%. Pct from Yr High is Down 2.21%.

Maybe it is impossible to absolutely pigeonhole any individual company or stock or style of investing.

The Bold and the Beautiful
Sunday September 16, 2007 : 06:07 PM

I've had almost $100,000 cash sitting in the fund since selling 2 oil refiners a while ago and by nature I hate to see any money idle, uninvested. (That's not logical, of course. There are times when holding cash is absolutely the best strategy.)

Although my Strategy Lab Fund has been doing poorly, a few winning stocks have emerged. In addition, there are some good candidates from my other 2 funds and re-running earlier screenings at Reuters resulted in one interesting company.

The Russians are coming! The Russians are coming! Well, no they aren't because they have huge challenges at home. Even so, screening found Mechel Open Joint Stock Company (MTL) with 6.55B market cap. Mechel, one of the leading Russian mining and metals companies, unites producers of coal, iron ore, nickel, steel, rolled products, and hardware. Their products are marketed domestically and internationally. Metals are supposed to do well, worldwide, but is it crazy to invest in a country which has so many economic problems? On the other hand, if there's anything the Russians used to be known for it is heavy industry and today's Mechel has modernized. They are constantly announcing new equipment, new production levels, new warehouses, and so on. So I took a gamble and invested $20,000 in them.

In my Magic Micro Caps fund a recent top performer is Simclar Inc. (SIMC) with only 63.55M market cap. It is a contract manufacturer of electronic and electro-mechanical products primarily in the United States. In spite of the rise in stock price, it still looks like good value by microcap standards; so I added $20,000 of SIMC.

The top winner by far in my Strategy Lab fund is China Mobile (CHL) telecommunication and related services in Mainland China and Hong Kong, 221.69B Mkt. Cap. Since I'd bought only a modest amount of CHL in the first place I put another $20,000 into them.

In my Great Global Growth fund, which is composed almost entirely of ETFs, the top performer is iShares FTSE/Xinhua China 25 Index Fund (FXI). Has FXI gone up so much that it is now overpriced? Or will the fund managers stay ahead of the game? It's hard to argue with success and since I still have some ETF "allotment" left I added $20,000 of FXI also.

Now I have $15,000 cash left but will sit on it for a while. There's a couple of larger holdings which are down (still), VSEC and AXE. I might sell half, but not all, of these because they still strongly meet my criteria. If I do sell, what should I buy with the next block of cash? Maybe more PKX and RIO, which have been going up and which represent only a modest part of my holdings. Then, the second-highest winner in my Great Global Growth Fund, PGJ, looks good. But that is another Chinese ETF and perhaps I am sinking too much money into Chinese investments.

It is time to sit back and see what the next week holds in the way of trends.

The Bold and the Beautiful - Epilogue
Monday September 17, 2007 : 12:12 PM

Today VSEC and AXE are again a couple of the weakest performers; so there is no point in putting off the decision. I've sold half of each. I've decided to buy another of my Magic Micro Caps which has been doing well recently, LB Foster Co. (FSTR). WIth 447.56M Market Cap it has outgrown microcap status. (My cutoff is 250M or 300M at the max.) This company makes products for the rail, construction, energy, and utility markets in the United States. You'd think that a railroad industry company founded in 1902 would be obsolete at this point but it is currently full of life. Top line and bottom line have been growing for the past 3 years and 2007 should be outstanding. The bad weather this summer severely damaged the railroads so that FSTR has lots of repair business. We do still depend greatly on rail transportation in this country, a fact that was borne home to us in Colorado recently. Due to the moisture our grain and other agricultural products had a bumper year; however we could not get enough transportation to haul it from the granaries and some of it simply rotted. Their misfortune is my fund's gain.

All My Comments (FYI How To Post Them)
Sunday September 23, 2007 : 01:12 PM

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Passions
Monday September 24, 2007 : 10:53 AM

I have to cultivate a better split personality. Last week I realized that when trying different strategies in different funds I can end up buying and selling the same stock at the same time. This is not illogical but it sure feels weird!

After the Fed's decision my Strategy Lab's fund went up along with the rest of the market; however that did not inspire any changes. My almost 2-year old Magic Micro Caps fund was another story. When a micro cap doubles I sell half because that's what Max Bowser says to do. SIMC went almost to 100% on the post-Fed surge; so I sold almost half. Yes, this is the same SIMC I had recently bought for the Strategy Lab fund.

Will the market drop this week? I almost hope so because I am holding a bit of cash to invest on the next downturn and I hate holding cash. Plus, part of me impatiently wants to get this bear market over with.

My more rational side, however, does not want a sudden plunge but hopes for a long, gradual, slope for the continuing downturn. Giving companies and individuals more time to adjust will lessen the overall impact.

No matter what happens it should be a good week for either Toro or Bruin.

Our Private World
Saturday September 29, 2007 : 01:35 PM

"What do you want, egg in your beer?" I can hear my father using his favorite expression every time I see a shareholder disappointed that an investment is doing merely "great" rather than making him into an instant billionaire.

One of my best Magic Micro Caps fund (MMC) companies, Twin Disc, Inc. (TWIN, trading on NASDAQ GM) is in a squabble with a major shareholder. Clarus Capital Group Management, LLP, is accusing TWIN of acting like a private company and not doing enough to raise the stock price.

In March 2003 TWIN was trading at around $5 - $6. At the beginning of July 2007 it was trading at around $81 - $83. Even after the recent plunge it settled at about $56 and is holding even.

The 3 yr. eps growth is 54.7%. The TTM eps change is up 50.94%. The 3 yrs. sales growth is 19.45%. The TTM sales growth is 30.38%. The balance sheet is strong. The TTM trailing PE ratio is 16.02. (From what I have read, in general a healthy company will have P/E ratio of 15 to 25.)

Today, with a Market Cap finally over $300K, TWIN is no longer a microcap and will be getting more attention. It is already attracting good press coverage.

With all this growth, in spite of the rise in stock price, price-to-sales is only 1.04 and price-to-book is only 2.95. (This is an industrial company; so price-to-book is meaningful.) Therefore, I believe the stock is still undervalued and I am considering it for the Strategy Lab fund.

Clarus thinks the stock is undervalued, too, but they are criticising the company for not doing enough about it. Well, in 2006 Twin Disc split the stock 2 for 1. At present the company is buying back shares. It is distributing a regular quarterly dividend. The company has a good investor relations section at its Website, holds earnings conference calls and presented at the Noble Financial Stock Conference in August. In addition it distributes releases announcing good news such as the fact that it was added to the Russell 2000 Index in June.

However, all this is not enough for Clarus. They would like to see yet more buyback and believe the company should "incur a more appropriate amount of debt and use the proceeds to repurchase its shares". Clarus filed a 13D saying that in addition to the stock buyback the company's board should consider an outright sale of all or part of the company. Then in an amended 13D filing Clarus disclosed a new letter to the Board again urging the company to hire an investment bank, saying there are parties who are interested in acquiring the company at a significant premium to its current price. They also express concern that this a family-run business, a situation they feel is not good for other shareholders. (Michael Batten, the CEO, is the company's largest shareholder, with about 21% of the stock, and his son is both an employee and on the board of directors.)

Twin Disc issued a press release in which Mr. Batten said that no way was the company going to sell itself and, "Our focus is on maximizing long-term value for all of our shareholders, including Clarus Capital. The Company's management and board of directors continue their ongoing efforts in various initiatives designed to achieve that goal...."

I wonder just who Clarus thinks would do a better job of running the company and who the "parties" are wanting to buy it. Hang in there, Mr. Batten!

All My Comments (FYI How To Post Them) -- Part Deux
Sunday September 30, 2007 : 04:14 PM

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